It's not a happy combo for investors. Coca-Cola and McDonald's both served up weak earnings on Tuesday. The challenge for the two companies risks becoming chronic as customers eat healthier or trade up to posher fare. Problems overseas, fierce competition and toppy markets mean neither stock looks like a bargain.
Coca-Cola's net profit fell 14 per cent in the three months to September from a year earlier. While partly the result of foreign exchange swings, weak sales in North America also hurt. Beverage shipments in Asia-Pacific, a supposed growth market, also barely grew in the period.
The results from McDonald's were arguably worse. The Big Mac purveyor's quarterly net profit fell 30 per cent. Its Asia-Pacific, West Asia and Africa business was hardest hit - sales at restaurants open for more than a year fell nearly 10 per cent in the wake of a food safety scandal in China. Like-for-like revenue in the all-important US market slipped 3.3 per cent.
The two long-standing fast-food partners are suffering for similar reasons: customers are no longer downing cheeseburgers, fries and Cokes like they used to. That's partly a health thing, but competition is the more immediate problem.
Burger King's revitalisation under private equity ownership and rising competition from more upscale burrito joints and sandwich shops are forcing McDonald's to fight harder for market share. Coca-Cola's weak performance in North America came despite higher ad spending and, with arch-rival Pepsi under pressure from activist investor Nelson Peltz, the battle for customers may only intensify.
Such challenges mean neither company looks cheap after the equity market boom of the past few years - although the $90-billion McDonald's, which trades at a market value of 16 times estimated earnings over the next 12 months, has more margin for error than Coke. The soda giant fetched 23 times next year's expected profit before Tuesday's report sent its shares down six per cent, wiping out $11 billion of market value.
Coke said it would target some $3 billion of cost savings by 2019, up from an earlier $1 billion by 2016. The fact that the soda maker's stock slumped despite the increased belt-tightening suggests the company has more work to do. The same message applies to McDonald's. With growth hard to come by, cutting fat is the best hope to keep shareholders satisfied.
